3.4.3 - Monopolistic competition

Question 1

What are the model characteristics of monopolistic competition ?

Answer 1

Differentiated products

There are no or low barriers to entry

Many firms operating in the market

Question 2

What is the demand curve like for firms in monopolistic competition ?

Answer 2

Downward sloping

Question 3

What does differentiated products do for firms ?

Answer 3

It allows them to build up brand loyalty among their regular customers

This gives them influence over price

Question 4

Do firms spend on advertising in monopolistic competition ?

Answer 4

Yes, heavy advertising is a common characteristic of a market operating under monopolistic competition

Question 5

What is demand like in monopolistic competition ?

Answer 5

It is price elastic

Question 6

What does a low concentration of firms mean in monopolistic competition ?

Answer 6

A price change by one of the firms will have negligible effects on the demand for its rivals’ products.

This is because there are many firms in the market

Question 7

What is the diagram for monopolistic competition like ?

Answer 7

The same as the monopoly diagram

Question 8

What will a firm making profits attract ?

Answer 8

More firms into the market

Question 9

What will new firms in the market produce ?

Answer 9

They will produce differentiated products

Question 10

What effects does the production of new differentiated products by new firms have ?

Answer 10

First, the new firms will attract some customers away from this firm, so that its demand curve will tend to shift to the left.

Second, as there are now more substitutes for the original product, the demand curve will become more elastic — remember that the availability of substitutes is an important influence on the own-price elasticity of demand.

Question 11

When will firms in monopolistic competition make normal profit ?

Answer 11

When AR = AC

This happens when there are many new firms in the market

Question 12

Is monopolistic competition allocatively efficient ?

Answer 12

No

Question 13

Is monopolistic competition productively efficient ?

Answer 13

No

Question 14

What are the three conditions that need to be met for a firm to price discriminate ?

Answer 14

• The firm must have market power.
• The firm must have information about consumers and their willingness to pay — and there must be identifiable differences between consumers (or groups of consumers).
• The consumers must have limited ability to resell the product.

Question 15

Is price discrimination possible in a perfectly competitive market ?

Answer 15

No it is not possible as the seller cannot vary their prices

Question 16

What makes price discrimination profitable for firms ?

Answer 16

Different consumers display different sensitivities to price: that is, they have different price elasticities of demand.

Question 17

If consumers could resell the product, is price discrimination able to take place ?

Answer 17

No, as consumers would engage in arbitrage

This would mean that the firm will no longer be able to sell at the high price, and would no longer try to discriminate in pricing

Question 18

What does price discrimination lead to for a firm ?

Answer 18

It increases a firms profits

Question 19

What is price discrimination ?

Answer 19

Price discrimination is when consumers are charged different prices for the same good or service

It could be on income or circumstances such as time preference

Question 20

What is third degree price discrimination

Answer 20

Third degree - When different groups of consumers are charged different prices for the same good or service

Only need to know the third degree